Facebook May Owe $5 Billion in Federal Taxes

Facebook might be on the hook to Uncle Sam for as much as $5 billion in taxes.

The company said it received a “statutory notice of deficiency” from the IRS in a Securities and Exchange Commission filing on Thursday. The notice only applies to the 2010 tax year, but as Facebook fb noted, the agency may extend its scrutiny to other tax years and balloon the tech giant’s federal income tax bill by $3 billion to $5 billion, plus interest and penalties.

“We do not agree with the position of the IRS and will file a petition in the United States Tax Court challenging the Notice,” wrote Facebook in its filing. “If the IRS prevails … the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations or cash flows.”

The IRS’s examination centers on the way Facebook shifted assets to its Facebook Ireland subsidiary. Regulators claim that Ernst & Young, the accounting firm Facebook hired to evaluate the assets being moved, may have used methodology which undervalued the transfers.

Parking profits and intellectual property abroad in order to avoid America’s nominal 35% corporate tax rate is a common practice among U.S. firms. A Reed College study from May estimated that American companies will avoid up to $135 billion in corporate taxes this year via profit-shifting.

The dispute between Facebook and the federal government has heated up in recent weeks. The Department of Justice sued the company earlier this month to force Facebook to turn over documents related to the IRS investigation. Facebook has consistently declined to provide many of these documents, according to federal officials.

“Facebook failed to appear on June 29, 2016, the date scheduled for compliance with the seventh summons, and did not produce the books, records, papers, and other data demanded,” wrote the IRS in its amended complaint earlier this week. “Facebook’s failure to comply with the seventh summons continues to this date.”

“Facebook complies with all applicable rules and regulations in the countries where we operate,” a Facebook spokesperson told Fortune when asked for comment on the merits of the IRS’ notice. The IRS declined to comment.

Here’s Another Sign a Recession Is Coming

Corporate profits are often used as an indicator of general economic health. And, typically, a strong economy is a large driver of stock prices. But if you look at all the factors in this equation, something isn’t adding up.

The S&P 500 spx is hovering near all-time highs, up about 9% from two years ago, and down only slightly this year. But data over the last week shows that U.S. corporate profits are struggling big time. And it isn’t just energy companies.

Late last week, the Department of Commerce said corporate profits before taxes fell 11.5%, by nearly $160 billion, from a year ago. For the year, profits decreased $64 billion, compared to an increase of $35 billion in 2014 from the year before.

The trend isn’t just a blip. Estimates for the first quarter this year are similarly bleak, according to senior earnings analyst John Butters at Factset. He says the bottomline of S&P 500 companies will fall 8.7% in the first quarter. If so, it will be the first time the index has seen four consecutive quarters of earnings declines since 2009.

There is a good chance he is right. Of the 119 companies in the index that have issued earnings guidance for the first quarter this year, 93, or 78%, of those companies have warned they are likely to miss estimates. Of course, companies are likely to pre-report if its going to be bad news to blunt the blow. Still, this quarter’s negative pre-reports is above the 5-year average of 73%, according to Factset. This statistic suggests more CEOs than normal see the prospects of their companies worsening rather than improving.

So far, though, much of these declines have been dismissed by investors because they are coming from energy companies. Take out this sector, Butters says, and the earnings decline is only 3.9%. However that shouldn’t give investors a false sense of hope.

Edgerton recently did an analysis using data from a survey called the “Quarterly Financial Report” that includes small, private companies not in the S&P 500. According to this data, non-energy firms account for about 40% of the decline in profits since the fourth quarter of 2014. “Smaller businesses not captured by the S&P 500 are seeing a profit decline even outside the energy sector,” he said.

It’s an important read-through to the economy. “The fact that firms outside the energy sector have seen only flat earnings despite a tailwind from low energy prices suggests that other factors are holding back their performance.”

Edgerton points, in part, to a tighter labor markets. Lower unemployment has made wages rise, which ultimately cuts into corporate profits. “When corporate margins are in a compressing phase—as they have been recently—the risk of recession becomes elevated,” he says.

According to Butters, the materials sector is predicted to report the second largest year-over-year decline in earnings of 21.9%, which is somewhat related to the energy drop. But even industrials, a sector that should benefit from lower energy prices, is suffering, with a year-over-year decline of 12.7%.

Investors might take note then of the current multiple of the equity market. The 12-month forward price-to-earnings ratio of the S&P 500 is about 16.4 times, versus the 10-year average of 14.2 times. It has been creeping up too. The same ratio was 16.1 times at the start of the first quarter, reflecting a 0.4% rise in the index while earnings estimates have declined.

Edgerton warns not to be fooled. Earnings began falling in 2000 and 2007, providing some warning of the 2001 and 2008 recession. Yet, analysts at the time, Edgerton says, like now, dismissed the drops initially, saying it was just high-tech and just financials. “An optimistic analyst could have convinced himself there was nothing to worry about,” he says.

Wall Street Faces Profit Recession

Wall Street’s fourth-quarter earnings season that gets under way next week could confirm something many investors may not want to hear: the U.S. economy may be doing well but corporate profits are in a recession.

An earnings recession – two quarters of declining profits – would be led by the usual suspects, energy and materials companies. But its severity may depend on consumer discretionary companies, which have been warning about profits at an unusual pace.

Consumer discretionary companies, which led S&P 500 gains in 2015 and have had the second-highest average profit growth rate of any sector over the last five years, are more pessimistic than usual going into the quarter. That is despite the benefit of lower gasoline prices for consumers.

Consumer discretionary stocks rose 8.4 percent last year, thanks in large measure to Netflix NFLX and Amazon AMZN, the year’s best S&P performers.

While consumer discretionary fourth-quarter profits are forecast to be up 8.4%, that is below the 13.6% growth that was forecast only three months ago, according to Thomson Reuters data.

Twenty-five companies in this sector so far have warned and none gave positive guidance, the highest number of negative forecasts since at least 2006, according to FactSet. In a typical fourth quarter, only two-thirds of earnings pre-announcements in this group are negative.

Macy’s this week cut its earnings outlook for the second time and blamed a fall in sales on unusually warm weather that kept consumers from buying coats. It also cited the strong dollar.

Companies that have warned also include L Brands LB, GameStop GME, Starbucks SBUX, Target TGT, and AutoNation AN. Specialty retailers have given the most negative guidance, while 17 companies in the sector have cited the strong U.S. dollar as a reason behind the lowered outlooks, FactSet said.

As earnings forecasts come down, some strategists say the expected boost to consumer spending from lower energy prices may have been overblown. Consumers still have debts to pay down.

“The thing behind the consumer not spending despite what looks like tailwinds from lower energy price (is), people are still deleveraging from prior to 2008,” said Robert Pavlik, chief market strategist at Boston Private Wealth in New York. “The consumer is still being weighed down.”

Earnings recession?

Overall, S&P 500 earnings are forecast to have dropped 4.2% in the fourth quarter. That would be their second-straight quarterly decline, Thomson Reuters data showed, which would meet the common definition of a profit recession.

Revenues are expected to be slightly less bad – with only a 3.2% decline expected, since profits can be lifted by stock buybacks, cost cuts and other maneuvers.

When final reports are tallied, S&P 500 companies are expected to show zero profit growth for all of 2015. Profit growth of 7.5% is forecast for 2016, but that estimate has also fallen since Oct. 1, when it stood at 10.3%.

The energy sector is expected to be the biggest drag on S&P 500 results as oil prices continue an almost relentless decline that began in mid-2014. The materials sector is also expected to show a double-digit profit drop, hit by a downward spiral in other commodities.

Goldman Sachs GS on Thursday lowered its earnings-per-share forecast for 2015, 2016, and 2017, saying energy was the main reason behind the revisions. It expects the sector to post an annual operating loss for 2015 for the first time since its data began in 1967. Goldman Sachs also cited the slowdown in China and signs that profit margins have peaked.

That could be bleak news for the stock market, which posted a slight loss for 2015 and has been battered at the start of 2016 by a China stock selloff and growing concerns over a global economic slowdown. Major indexes lost about 6% last week, the worst start to a year since records were kept.

Even with the selloff, valuations are stretched. The S&P 500 trades at 15.7 times forward earnings, well above its 10-year median of 14.7, according to Thomson Reuters data.

“We go into fourth-quarter results and energy is still getting obliterated. Which are going to be the leadership groups? My worry is they’re not going to materialize,” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta.

Why America’s Big Banks Are Predicting a Recession

The U.S. economy is faring better today than at any point since the Great Recession ended in the middle of 2009.

Jobs growth is strong and accelerating and the unemployment rate is below its historical average. The stock market remains near all-time highs, and the Federal Reserve appears confident enough in the economy’s strength to raise interest rates next week.

But before you bust out the noise makers, take a look at some of the 2016 economic outlooks from large investment banks like Citigroup and JPMorgan. Though economists at neither bank see the U.S. entering a recession soon, these reports underscore the fact that the current economic expansion is actually quite long by historical standards, and like all other expansions, will end at some point in a recession.

The Citi report, released last week, looks at data on the length of economic expansions in data from 1970-14 across U.S., U.K., Germany and Japan. “As the U.S. [economic expansion] enters year seven the cumulative probability of a recession in the next year rises to 65%,” writes Citi economists.

But there is reason to take this approach for a recession prediction with a grain of salt. While it’s true that today’s expansion is long in the tooth, there’s reason to believe that the relative weakness of the economic recovery will guarantee it’s longevity. That’s because recessions tend to occur when the economy overheats—producing more stuff than demand warrants. With inflation still low, and underemployment still high, most economists think we can bet on today’s expansion lasting significantly longer than others.

But that doesn’t mean that we shouldn’t start at least thinking about battening down the hatches. JPMorgan’s 2016 outlook predicts some stormy economic weather ahead, just not as soon as next year.

JPMorgan is putting a 76% chance of a recession within the next three years, with just a 25% of chance of a recession within the next 12 months. One of the main reasons the bank is bearish in the medium term is the trend in corporate profits. According to the report, over the past year corporate margins have fallen more than five percent, which isn’t good news. “On most (but not all) of the occasions when this variable fell to its current level, a recession began within a few years,” JPMorgan economists write. “Although continued expansion remains our baseline forecast, we will more carefully investigate the risks of recession emanating from the corporate sector.”

JPMorgan economists aren’t the first to worry about the state of corporate profits. We are now in the midst of a corporate profits recession, driven in part by weak commodity prices and slow economic growth abroad. At the same time, corporate margins have hit all-time highs in recent years, and analysts believe this is one reason for the slow growth in wages of late. If declining profit margins are the result of employers giving a larger piece of the economic pie to their workers, that could help boost consumer spending and therefore economic growth.

But falling margins could simply be a predictor of a tepid appetite for corporate investment, which has already been weak to begin with. The smart money is, for the time being, on continued economic growth for the next year or two. But given how old the current expansion is, it makes sense to keep one’s eyes peeled for recession signals.

Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realized, already costly stocks could become pricier and equity investors could become even more skittish.

Forecasts for third-quarter S&P 500 earnings now call for a 3.9 percent decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong U.S. dollar and weak global demand.

Expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2 percent, the lowest since late 2009, when it was down 10.1 percent, according to Thomson Reuters I/B/E/S data.

That’s further reason for stock investors to worry since market multiples are still above historic levels despite the recent sell-off. Investors are inclined to pay more for companies that are showing growth in earnings and revenue.

The weak forecasts have some strategists talking about an “earnings recession,” meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters.

“Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston.

The S&P 500 is down about 9 percent from its May 21 closing high, dragged down by concern over the effect of slower Chinese growth on global demand and the uncertain interest rate outlook. The low earnings outlook adds another burden.

This week, Caterpillar slashed its 2015 revenue forecast and announced job cuts of up to 10,000, among many U.S. industrial companies hit by the mining and energy downturn. Also this week, Pier 1 Imports cut its full-year earnings forecast, while Bed Bath & Beyond gave third-quarter guidance below analysts’ expectations.

“We are continuing to work through the near-term issues stemming from our elevated inventory levels and have adopted a more cautious and deliberate view of the business based on our first-half trends,” Jeffrey Boyer, Pier 1 chief financial officer, said in the earnings report.

On the other hand, among early reporters for the third-quarter season, Nike shares hit a record high after it reported upbeat earnings late Thursday.

Negative outlooks from S&P 500 companies for the quarter outnumber positive ones by a ratio of 3.2 to 1, above the long-term average of 2.7 to 1, Thomson Reuters data showed.

“How can we drive the market higher when all of these signals aren’t showing a lot of prosperity?” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia, who cited earnings growth as one of the drivers of the market.

To be sure, the vast majority of companies usually exceed their earnings forecasts when they report real numbers.

“This part in the earnings cycle is typically the low point for estimates,” said Greg Harrison, Thomson Reuters’ senior research analyst. In the first two quarters of 2015, companies went into their reporting season with analysts predicting a profit decline for the S&P 500, and in both quarters, they eked out gains instead.

In the last two weeks, analysts have dropped their third-quarter earnings predictions by about 0.3 percentage point. There was no change in estimates in the final weeks of the quarter in the first two quarters of 2015.

And companies may be snapping their streak of squeezing profits out of dismal revenues. For the first time since the second quarter of 2011, sales, seen down 3.2 percent in the third quarter from a year ago, are not projected to fall as fast as earnings. Companies have been bolstering their earnings per share figures by buying back their own shares and thus reducing their share counts, and that may happen again this quarter.

COSTLY SHARES

Even with the recent selloff, stocks are still expensive by some gauges. The S&P 500 index is selling at roughly 16 times its expected earnings for the next 12 months, lower than this year’s peak of 17.8 but higher than the historic mean of about 15. The index would have to drop to about 1,800 to bring valuations back to the long-term range. The S&P 500 closed at 1,931.34 on Friday.

Moreover, forward and trailing price-to-earnings ratios for the S&P 500 are converging, another sign of collapsing growth expectations. The trailing P/E stands at about 16.5, Thomson Reuters data shows. Last year at this time, the forward P/E was also 16 but the trailing was 17.6.

The last period of convergence was in 2009 when earnings were declining following the financial crisis.

The 3.9 percent estimated decline in third-quarter profits – down sharply from a July 1 forecast for a 0.4 percent dip – would be the first quarterly profit decline for the S&P 500 since the third quarter of 2009.

Energy again is expected to drag down the S&P 500 third-quarter forecast the most, with an expected 64.7 percent decrease in the sector. Without the energy sector, the forecast for third-quarter earnings shows a gain of 3.7 percent.

Earnings for the commodity-sensitive materials are expected to fall 13.8 percent, while industrials’ earnings are seen down 3.6 percent.

(Reporting by Caroline Valetkevitch; editing by Linda Stern and John Pickering)

Friday’s jobs report: Even good news could be harsh on markets

In a stock market that lives and dies on central bank stimulus, good news can be very bad indeed.

That’s because as the the job market continues to recover and we approach what the Federal Reserve considers full employment, it makes it less likely that the central bank will continue with its policy of near-zero interest rates.

Meanwhile, an announcement of strong job growth tomorrow will give further evidence that the labor market is tightening, which will likely mean that businesses will have to continue to increase what they pay their workers to stay competitive. This narrative would be corroborated by the latest reading of the employment compensation index, which showed last week that worker pay has been rising faster than at any point since the end of the recession.

Another worrying data point along these same lines is just how well corporations have been doing in squeezing out profits from their operations:

As you can see, corporate profits as a share of GDP are higher than they’ve ever been. While it’s not a given that this figure will revert to the historical mean, it does suggest that corporations are riding about as high as they can. A tightening labor market, and the wage inflation that it will likely bring, is just one obstacle Corporate America faces in its quest for continued profit growth.

At the same time, what’s bad for the stock market could be good for the economy in general. Stagnant wages are a huge problem for the U.S. economy, which is powered by consumer spending. If a stock market correction is a signal that workers are getting a bigger piece of our economic pie, that is likely a positive for the overall economy, even if company valuations take a hit.

In the short run then, a jobs number miss will likely be good for markets. It will bolster the case that the Fed should wait to raise interest rates until next year and perhaps calm fears of wage inflation. But with the recent data showing that the economy may very well have shrunk in the first quarter, a jobs report miss could be a sign that our current economic expansion, which is already the sixth longest in American history, could be running out of steam.

And it’s possible that some companies have already gotten wind of this shift. Indeed, I wrote yesterday about an analysis from Jodi Gunzberg, global head of commodities at S&P Dow Jones Indices, which argues that recent spikes in demand for raw materials suggests that corporations are battening down the hatches and preparing for stormy economic times ahead.

How to use that $900 billion of offshore cash to create U.S. jobs

One of the stories that firms deserting our country like to tell is that by moving their corporate domicile (but not their actual headquarters) outside the United States to duck taxes, they will be able to use cash they currently have parked offshore to expand their operations in the U.S.

So when the new rules the Treasury issued in September upended the biggest proposed corporate “inversion” in history—Illinois-based AbbVie’s ABBV $54 billion takeover of Ireland-based Shire—there was whining about how the Treasury is killing prospective American jobs.

To which I say: give me a break. Under current law, it’s already relatively simple, inexpensive, and profitable for an American company to use its offshore cash for productive and job-adding U.S. projects. And as I think you’ll see, the method we’re talking about, which Standard & Poor’s has dubbed “synthetic cash repatriation,” looks like a better long-term deal for shareholders than paying a multi-billion-dollar premium to buy an offshore company in an inversion deal.

In an inversion, a U.S. company buys a foreign company, technically sells out to it, and thus transforms itself into a non-U.S. company to avoid high U.S. taxes, but continues to benefit from being in our country. That’s why I (and subsequently President Obama) have taken to calling these inverters “deserters.”

U.S. companies rarely bring home the profits they earn in other countries, because that would subject them to the 35% U.S. corporate income tax, less the tax (if any) paid where the money was earned. As of June 30, S&P estimates that the U.S. companies whose credit it rates held $906 billion of cash offshore, money that would be subject to U.S. tax if companies brought it home directly.

But there’s a simple and obvious way for companies to use the cash indirectly to fund U.S. investments. Think of it as “clever borrowing.”

Here’s how it would work. It’s a play in three acts.

Act One We start with something I learned from tax expert Edward Kleinbard, a University of Southern California law school professor and a prolific, witty, and effective polemicist whose new book, We Are Better than This: How Government Should Spend Our Money, is a must-read for anyone who wants to be educated about taxes and social policy.

Kleinbard told me something that I should have known but didn’t: American companies are required to pay U.S. income tax on interest and dividends earned on their offshore cash, regardless of whether that income is repatriated to the U.S. (For details, ask a tax techie about Subpart F.) That’s something that very few people know, but it’s really important for our analysis.

Act Two Last April, S&P issued a nifty report showing how some big U.S. companies are indirectly using their offshore cash to facilitate cheap borrowing in the U.S. That’s the practice that S&P dubs, quite cleverly, “synthetic cash repatriation.” In case you’re interested—and you should be—offshore cash is 60% of the total cash that S&P-rated companies had on their books as of June 30, up from 44% at year-end 2009.

Now, let’s combine Acts One and Two. Because the income earned on firms’ offshore cash is taxable in the U.S., there’s no penalty for repatriating that income into our country. So a company with offshore cash can borrow in the U.S. and use the income earned on its offshore money to pay some or all of the (tax-deductible) interest that it incurs on its U.S. borrowing.

If the interest rates at which a company invests its surplus cash offshore and borrows in the U.S. for projects here were identical, the offshore interest income would totally offset the U.S. interest expense. But in the real world, the money a company would borrow to fund a productive, job-creating project would typically have a longer maturity than the short-term securities in which firms generally stash their offshore cash. Therefore, money borrowed in the U.S. to fund a project here would carry a higher interest rate than what the offshore cash earns.

So let’s say a company is earning 1% on its offshore cash and pays 3% to borrow here. After taxes—remember, interest paid in the U.S. is deductible to the borrower—that 2% spread costs the company only 1.3%.

Act Three The grand finale: A big company that wants to make a capital investment in the U.S. typically has a “hurdle rate”—a minimum return that it expects to earn on that investment—of at least 10% after taxes.

If an investment isn’t likely to earn at least the hurdle rate return, the company probably won’t make it, regardless of where the cash to pay for it comes from. If the projected profit exceeds the hurdle rate, the company will make the investment. Shelling out 1.3% after tax to finance an investment expected to earn double digits after tax is a no-brainer.

Using offshore cash to borrow cheaply in the U.S. strikes me as a better long-term deal for shareholders than having a company shell out big money to buy an inversion partner, and then having to make that corporate marriage work. (The acquisition has to be sizable, relative to the inverter’s stock market value, for the deal to qualify for inversion treatment under the tax code.)

There’s no question that a 1.3% annual cost makes “financial engineering” maneuvers, such as using U.S. borrowings to pay dividends and buy back shares, less lucrative for shareholders than they would otherwise be. However, as we’ve seen, if a company wants to use synthetically repatriated cash to expand and grow, that 1.3% isn’t a big deal.

My conclusion: the idea that a U.S. company with offshore cash has to invert and desert our country in order to make an investment here is nonsense. Up with intelligent borrowing. Down with whining.

This is an expanded version of a column that will appear in the November 17, 2014 issue of Fortune.

The stock market may be shrinking, but it’s not broken

The stock market is shrinking, and that’s got an economics professor spooked.

According to study published this week by Harvard Business Review, over 90% of the profits generated by companies in the S&P 500 over the past decade or so has gone toward either dividends or stock buybacks (when companies repurchase their own shares). The study’s author, William Lazonick, an economics professor at the University of Massachusetts at Lowell, says that’s bad news because it leaves very little money for companies to invest in projects that may produce greater long-term profits and create more jobs.

But his larger point is this: the U.S. stock market used to be a value creation vehicle for the economy. People invested money in companies, and companies used that money to grow their businesses. That created more shares in the stock market, more money for companies to invest, and more jobs. Now, the opposite is happening. Lazonick says the market has become a value extraction machine. Profits are being sucked out of the economy by way of the stock market. That’s shrunk the amount of money and shares companies have. Will the last person left in the stock market remember to turn off the lights?

Of course, people and companies aren’t exactly abandoning the stock market. Share prices are near all-time highs. And more companies have been going public. The 188 IPOs this year in U.S. public markets have raised $40 billion, up 44% from 2013.

What could be happening is that as the economy has shifted to services, companies have needed less capital. So, the large companies in the S&P 500 are returning that capital, and investors are putting their money into newer companies that are growing. Recirculated investments can help create jobs as well.

It looks like the big uptick in buybacks (the stock market shrink) started in 2003 and crested in 2008. At least some of that has to do with taxes. In 2003, Congress enacted George W. Bush’s third tax cut, the biggest part of which was a huge reduction in the rate paid on dividends. And you can basically ignore 2008. Dividends and stock repurchases were large as a percentage of profits that year because corporate profits were so low.

Starting around 2010, economists grew increasingly concerned about the fact that higher profits were not leading to more hiring. But in the past few years, buybacks and dividends have looked kind of normal, at least in the context of the last 30 years.

Lazonick says that corporate greed has driven the buyback and dividend trend and has contributed to growing inequality. Executives hold a large portion of their companies’ shares and they are also paid in stock. Buybacks and dividends help them more than the average worker. While that’s true, investing in businesses that boost profits would presumably cause the company’s share price to go up as well. Granted, the payoff from buybacks and dividends comes more quickly than such investments. But the boost you get from those methods is temporary.

The total number of outstanding shares of all the companies in the S&P 500 is 312 billion. That is down from a 2010 peak of 332 billion. That figure quintupled in the 1990s to 280 billion. So, the recent dip is very small, and perhaps overdue.

I talked to an activist hedge fund manager who has previously pushed for companies to cut research and development budgets to boost profits and pay out dividends about Lazonick’s study. He said that companies two decades ago were wasting billions on R&D on projects that never produced profits. But, he said, companies have grown much more sophisticated about how and when they spend their dollars. And he thinks corporate America is much smarter about how it spends its money than, say, during the run up to the dot-com bust. Although, he added, the pendulum may have swung too far in the other direction.

Lazonick is probably correct: too much of Corporate America’s cash these days is going to shareholders and not enough is going to workers. That’s the story of Thomas Piketty’s economics bestseller Capital in the 21st Century. A simple look at corporate profits, which are way up, and wages, which are flat, will tell you that. But that does not mean the stock market is broken.